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By November 26, 2012 4 Comments

Record Backlog Assures Astronics (NASDAQ: ATRO) Revenue Visibility

Record Backlog Assures Astronics (NASDAQ: ATRO) Revenue Visibility

Record Backlog Assures Astronics (NASDAQ: ATRO) Revenue Visibility

Shares of Astronics Corp. (NASDAQ: ATRO), a leading supplier of products to the aerospace and defense industries is under pressure. Its shares have fallen by 29% for the year. It is also currently trading near its 5-week low of around $21.00 per share. The company operates in the US and Canada. Its offerings include lighting systems, electrical power generation systems, aircraft safety systems, electrical power distribution systems as well as avionics databases for the global aerospace industry.

It recently reported that third quarter earnings per share of $0.33, missing analyst estimates of $0.44 per share for the period. If you compare the results to the previous year, this is a decline of 26%. Investors were disappointed with the bottom-line results despite a strong topline growth. Consolidated sales for the period increased by 22% to $68.9 million. Its aerospace sales posted an increase of $12.3 million while the Test Systems segment increased slightly by $0.2 million. This brings the consolidated sales for the first nine months of 2012 to $199 million, an increase of 19.2% year on year.

While this seems like a strong quarter for Astronics, its expenses have dampened its overall profitability.  Operating expenses reached $9.1 million, compared to the previous year’s $6.4 million. The increase in expenses is due to its acquisitions of Ballard Technology and Max-Viz. It also incurred higher engineering and development activity, as well as increased warranty and inventory reserves. Investors may have overreacted as these expenses appear to be non-recurring in nature. Other operating expenses mentioned above are linked to the increased business activity of the company. Excluding the one-off acquisitions-related transactions, expenses would have increased modestly. For the last couple of years, operating margins have improved to 13%. This is better than the historical average of around 7%. This means that management has control over its expenses, implying better operating margins for the coming months.

Meanwhile, its backlog reached record levels of $114.2 million at the end of the trailing second quarter 2012. This is higher than the previous year’s backlog of $110.2 million. It estimates that around $67 million in backlog will be shipped by the end of 2012 and approximately $100 million to be shipped over the next quarters. Management expects backlogs to increase over the next few years in the light of increasing build rates of new commercial aircrafts and the introduction of new and innovative products. For instance, it recently teamed with Hawker Beechcraft Global to provide new light emitting diode landing and taxi lights for the Beechcraft King Air Family. Going forward, it expects to bag contracts related to these types of innovative products.

It sees revenues hitting $267 to $275 million for the year. The aerospace segment is expected to contribute $263 million revenues while the Test Systems segment is expected to chip in $10 to $12 million for the year. Analysts expect the company to post net profits of $1.62 per share for the year. This is a decline of 10% compared to the same period last year, however for the next 5 years, Astronics is forecasted to grow its earnings by 19% a year.

The stock trades at 8.1 times forward earnings and 0.8 times earnings growth. Competitors such as TransDigm Group (NYSE: TDG) and Breeze-Eastern Corp. (NYSE: BZC) are both valued at more than 20 times earnings. Given the strong financial track record of the company, it should be valued at more than a double-digit earnings multiple. The market short sightedness does not seem logical and it creates a huge gap between where the company’s future growth is projected to be and the market’s expectations. Thus, investors can profit from this mispricing over time.

Meiko Acebo

Written by

Meiko is an CPA and Equity Analyst based in Manila with diverse experience in various industries and sectors. He is an ardent follower of the value investing principles of Warren…

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